Communique -- January 2016

In this issue
  >>  403(b) contribution limits for 2016
  >>  IRA contribution limits for 2016
  >>  Vesting schedules available for 403(b) plans
  >>  Hardship rules
  >>  Employee termination notice
403(b) contribution limits for 2016

The 403(b) standard elective limit or maximum contribution for 2016 will be $18,000 or 100% of compensation (whichever is less) for employees under age 50.

The 15 years of service catch-up provision—Employees with 15 years or more of service with the same employer may qualify to save up to $3,000 per year over the $18,000 standard elective limit. The maximum lifetime limit for this provision is $15,000.

The age 50 and older catch-up provision—In 2016, employees over age 50, or turning age 50 by year’s end, may contribute $6,000 over the $18,000 standard elective limit.

An employee may be eligible to take advantage of both catch-up elections simultaneously if the employer plan allows. When an employee is eligible for both provisions, the additional contributions apply to the 15 years of service provision first and thus reduce the aggregate lifetime limit provision.

Please review your salary reduction agreements and/or vendor agreements to ensure they do not give your employees the false impression that they have a choice between the age provision and the service provision. Contributions in excess may result if the provisions are applied incorrectly. We recommend that employees who wish to contribute more than the standard elective limit and have 15 or more years of service complete a Contribution Limit Calculation Form. For districts that have a Third Party Administrator, it’s possible they will calculate the limits for the employees.

All of the above limits apply to before-tax AND Roth 403(b) contributions. Participants may contribute to one or both but the limit represents the maximum combined contribution.

Internal Revenue Service Elective Contribution Limits  
  2015 2016
Salary Reduction Contribution Limit $18,000 $18,000
15-Years-of-Service Catch-Up $3,000 $3,000
Age-50-and-Over Catch-Up $6,000 $6,000
Possible Maximum $27,000 $27,000

Total Contribution Limit–employer and employee contributions
In 2016, the maximum annual total contribution limit is the lesser of 100% of the employee’s compensation or $53,000 (remains the same as 2015). However, employees age 50 and older may be eligible to contribute more.

IRA contribution limits for 2016

The IRA contribution limits remained the same as in 2015. The table below reflects the maximum contribution for a contributor that has sufficient earned income or files a joint tax return with a spouse who has sufficient earned income. Adjusted Gross Income limits apply and we recommend contributors consult their tax advisor regarding any eligibility concerns. Participants may contribute to one or both but the limit represents the maximum combined contribution.

IRA Contribution Limits  
  2015 2016
Under Age 50 $5,500 $5,500
Age 50 and Over $6,500 $6,500
Vesting schedules available for 403(b) plans

While vesting options have always been available in 403(b) plans, public schools are giving the idea more consideration as they are looking to provide additional low cost benefits to employees and find tools to increase staff recruitment and retention.

Employers may choose a graded system where a certain amount of money is vested each year. There is also the option for a cliff system where no portion of the funds are vested until a specific time period has passed and then the whole amount becomes vested.

Employer contributions do not need to be contributed as a dollar for dollar match. The employer may opt to match a certain percentage, either more or less than the employee contributions, depending on how the employer wishes to handle the benefit.

Any funds sent by the employer as part of a vested option are considered non-elective funds. Regardless of the specific details of the program created by the employer, any employer funds forfeited by an employee must remain in the district's 403(b) plan to be paid out against any future claims.

We encourage you to contact your WEA Member Benefits Worksite Benefits Consultant or give us a call at 1-800-279-4030 if you have any questions about making this benefit available to your employees.

Hardship rules

One of the most common concerns the IRS has during plan audits is how hardship distributions are handled. We thought it might be helpful to review the procedure we have for these requests. The steps may vary depending on what is specified in your plan documentation or whether your district uses a Third Party Administrator (TPA).

When a call comes in requesting a withdrawal we review the account and check the options against what is allowed by the employer’s plan documents. If hardship withdrawals are allowed and no other options are available, then we discuss the rules and criteria with the participant. The WEA Member Benefits Hardship Withdrawal paperwork is then sent out and we also provide employer or TPA contact information if there is a requirement for that.

When the completed paperwork is received back in our office, we review the details and determine eligibility under IRS guidelines. If we have approved the request and received any necessary employer or TPA approval, we distribute the eligible funds to the participant. We also follow up with the employer to confirm the hardship distribution is processing.

The IRS requires that the participant not contribute elective funds to any 403(b) accounts through payroll deduction for six months after the hardship distribution occurs. Once the six months has elapsed, it is the employee’s responsibility to request contributions to restart. If the hardship distribution is denied for any reason, then we inform the participant and no change is required to payroll deductions that may be occurring.

This can be one of the most complicated distributions allowed under IRS rules and we encourage you to contact us or refer the employee to us if any questions come up. Our Member Service Representatives can be reached at 1-800-279-4030.

Employee termination notice

Does your 403(b) plan include a vesting schedule? If so, it is imperative that you notify us when one of your employees leaves the district. Once we are informed of the employee’s date of termination, we can update our records and move any non-vested funds to your district’s forfeiture account.

The Communique is for informational purposes only and is not intended to constitute legal, financial, or tax advice. Certain recommendations or guidelines may not be appropriate for everyone. Consult your personal advisor or attorney for advice specific to your unique circumstances before taking action.

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